A good amount of media attention has been paid to on-demand warehousing over the last few years, characterizing it as a marriage ‘made to last’ between warehouse operators and those in need of warehouse space. The love affair seems like a natural pairing at first passionate glance, allowing anyone to earn some extra revenue off of their underutilized space, while at the same time providing solutions to retailers in need of warehousing and fulfillment services. However, when you break it down, on-demand warehousing and fulfillment, while an interesting match for a very select few, may be more like a horrible one-night fling for most businesses.
What Is On-Demand Warehousing And How Did It Originate?
On-demand warehousing and fulfillment is:
- A platform where warehouse space providers can rent out their excess space to others
- Similar to, and has been popularized by, companies like Airbnb and Uber
- An attempt to disrupt traditional methods of warehousing like leasing space or using a 3PL provider
- Typically run completely through a platform such as Flexe, Stord, Flow Space, or Ware2Go
The idea of this system is similar to Airbnb: Companies have extra space that is under-utilized (around 20 percent excess capacity, according to a small study by Stord). Other companies need extra space. Why not connect these companies?
All the while, the concept seems even more like a marriage made in heaven because average rental rates for warehousing space are spiking dramatically (16.9 percent over the past two years), driving both warehouse owners to want to make the most out of that last 20 percent of capacity, as well as driving warehouse seekers to look for less cost-prohibitive options.
Why On-Demand Warehousing Can Quickly Lead to Divorce
That all sounds good and logical right? Companies who need seasonal space or fulfillment services can rent space or procure fulfillment resources from others and it will be beneficial to everyone. However, like most everything else that sounds fantastic on paper, there can be some very real downsides to this model. Let’s explore just a few.
You’ll Pay Dearly For The Wedding
First and foremost: money. On-demand fulfillment is supposed to reduce cost, which makes sense considering the “rent someone’s extra space” model. However, using these services will most likely cost more, not less.
When there is a middle-man involved, they have to be paid for their services. In the case of on-demand platforms, a commission is charged for the use of their system and for getting connected with the resources in their network. While they may be paying a low rate to the warehouses in their network for the use of their space (rates are as low as $5 per pallet per month for storage), they’re marking up the cost to a level that ends up being even higher than if you went to a warehouse or 3PL service directly.
As a small example, even though they’re paying warehouses as little as $5 per pallet per month for the use of their excess space, they’re charging users of the warehouse service upwards of $10-15 per pallet per month, when according to some surveys the average cost of using a 3PL warehouse is $9 per pallet per month. Similarly, fulfillment fees for pallet shipments through an on-demand service range from $7-12 per pallet in and out (versus $3-5 per pallet in and out on average for 3PL services), and fulfillment fees for individual small parcel orders through an on-demand service range from $2.25 without shipping to $10 including shipping for small weight packages (versus a range from $1.85 to $9.50 using a 3PL warehouse).
And be careful because most of the on-demand services don’t say exactly how much they charge for shipping costs. As a result, they may be earning a hefty portion of their discounted rates and you may be paying more than if you used your own shipping discounts or those of a third party warehousing company.
All in all, it appears to be a very extravagant wedding with a significant cost that will start your fulfillment marriage off in debt.
On-Demand May Not Be Who They Claim To Be After The Honeymoon
Making sure you know who you’re getting married to is imperative to making a proper judgement for a marriage that lasts. Similarly, choosing a warehousing and fulfillment solution requires full knowledge of who you’ll be “shacking up” with. In the case of on-demand fulfillment, the absolute truth is that you could be joined in holy matrimony with a company that doesn’t necessarily have any experience with your products or industry or potentially doesn’t offer 3PL warehousing services altogether. While it’s romantic to think that “anyone” can store and ship your orders, you have to be certain that you’re comfortable with someone providing you with their “excess” time that they have after they perform all of their company’s more important tasks.
Ask yourself the following:
- Do you want a warehouse operator that isn’t accustomed to performing third party fulfillment and shipping of orders?
- Do you want a warehouse performing your logistics tasks after they’ve taken care of all of their important company tasks?
- Do you want a 3PL firm shipping your orders when they’re making less per order than they do with all of their other customers?
We’re not talking about renting out your house for a weekend or offering a taxi service with your car — we’re talking about your sophisticated order fulfillment needs.
On-Demand May Not Be Your Ideal “Match”
Are You The Needy Type?
Not that anyone wants to admit that they’re needy, but oftentimes this is precisely the case when it comes to fulfillment services. Some companies are completely comfortable with their packages being shipped in Amazon boxes or not being able to custom tailor their inserts or packaging. For others, a commoditized approach doesn’t work. Just in the same way a large business such as Amazon has to “force” its customers into strict guidelines and procedures, on-demand companies are similarly forced to create systems and procedures that lack flexibility or else they’ll pay the price with errors. Regular 3PL warehouses have a greater ability to customize the experience and meet the specific needs of brands.
Are You Too Young For Your Partner?
Age isn’t just relevant in relationships – it’s also important in the logistics industry. In fact, many 3PL warehouses won’t work with pure start-ups, and oftentimes warehousing companies require strict minimum order volumes or charge monthly minimums on invoices. On-demand companies are even more restrictive, requiring pallet storage in excess of 50 pallets per month at a minimum level. While there are traditional 3PL warehouses that are happy to help start-ups and small businesses, on-demand warehouses avoid lower volumes like the plague. Younger and growing companies, therefore, will find it difficult to garner interest from on-demand warehouses.
Are You The Type That Likes to Talk?
Good communication is a key ingredient to the success of a marriage, and warehousing success is no different. On-demand warehousing providers claim to offer better customer service than 3PL providers, but this claim seems suspicious at best. Oftentimes, questions need to be answered by people with “boots on the ground” in the warehouse, which means you won’t necessarily get all of the answers you need by logging into their fancy systems. On-demand warehousing firms will have to communicate with the actual warehouse staff itself, wait for a response, and then communicate the results back to you. Adding a layer within the communication funnel adds time to the equation which could cost you dearly.
Do You Need More Quality “Time” with Your Partner?
Amazon’s free two-day delivery truly has changed the industry, and other companies feel like they must keep up by offering quicker shipping and delivery times to customers.
However, quick delivery times aren’t required by most businesses. Recent studies have shown that customers value lower cost shipping over quick shipping, and only a very small percentage of consumers actually require both. Eighty-seven percent of shoppers value free shipping over fast shipping, and a 2017 Shippo survey showed that only three percent of customers wanted same-day shipping, while 44 percent were fine with four to seven days).
This shows that while shipping speed is important, and Amazon has changed customer’s expectations of shipping a little, speed isn’t everything. Consumers still value low-cost shipping and have reasonable expectations of shipping times, especially when purchasing items from small to medium sized retailers.
Weigh all the Options
In most cases, on-demand warehousing and fulfillment is extremely problematic and not worth the hype. However, there are a few instances when on-demand warehousing could be a viable option.
- Very simple, pallet in, pallet out scenarios (especially deals with volume greater than 50 pallet minimums)
- Situations where you can’t find a warehouse solution in a particular local area
It definitely pays to take some time to weigh your individual situation and all the pros and cons before investing heavily into the on-demand fulfillment model. After all, what appeared at first glance to be a long-term marriage made for the ages might actually end up being a disastrous one-night stand that leaves your business looking for love from another partner.
Will Schneider is the founder of insightQuote, a match-making service for B2B services. Previously, he ran two privately held fulfillment companies and served on the executive team of one of the largest online lead generation services in the insurance industry.